January 02, 2013

Should Benjamin M. Lawsky, Superintendent of New
York's Department of Financial Services, acting as Receiver for
Executive Life of New York, (Superintendent) receive a "free pass"
for all actions taken by Lawsky, his predecessor Superintendents and their
agents during the past 21 years with respect to the Executive Life of New
York (ELNY) rehabilitation and liquidation no matter how egregious and
regardless of whether or not those actions were taken in good faith
and/or constituted illegal conduct under Article 74 of New York's
insurance law?

Motion for Contempt Order

That is the central strategic question posed by attorney Edward Stone and the Christensen & Jensen law firm (ELNY shortfall attorneys) in their Memorandum of Law responding to a Motion filed last month by attorneys representing the Superintendent with the Nassau County New York State Supreme Court to:

Enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit filed November 8, 2012 in the United States District Court Southern District of New York;

Hold in contempt of court the shortfall payees' legal counsel; and

Require their payment of the related costs and attorney's fees incurred by the Superintendent.

Characterizing the Superintendent's Motion for a Contempt Order as a "SLAPP" ("strategic lawsuit against public participation"),
the ELNY shortfall attorneys argue in their Memorandum of Law that the
Superintendent's Motion should not be condoned and that the
Superintendent "is presumably wasting estate assets to avoid a
proper inquiry into malfeasance by his predecessors and
agents,continuing a disturbing pattern."

ELNY Class Action

In their class action Complaint, the named ELNY shortfall payees and their attorneys assert
causes of action against the Superintendent and his predecessors, in
their personal capacity: 1) for breach of fiduciary duty and fraudulent
concealment in not conducting the rehabilitation of ELNY in good faith;
2) for self-dealing; 3) for material misstatements; and 4) for
fraudulently concealing and failing to disclose material information
regarding ELNY’s financial status. See the ELNY Allegation Timeline for S2KM's re-configuration of selected allegations of malfeasance from the class action complaint.

Superintendent's Contempt Argument

In their Memoradum of Law supporting their Motion for Contempt, the Superintendent's attorneys argue:

The
ELNY class action lawsuit violates an injunction provision in the ELNY
Liquidation Order signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012; and

"It is literally hornbook law that[a] violation of an injunction constitutes a contempt.'”

The ELNY Liquidation Order injunction: “enjoins
and restrains [all persons] from commencing or further prosecuting any
actions at law or other proceedings against ELNY or its assets, the
Receiver or the New York Liquidation Bureau [NYLB],
or their present or former employees, attorneys, or agents with respect
to this proceeding or the discharge of their duties under Insurance Law
Article 74.”

ELNY Shortfall Payees' Argument - In their Memorandum of Law Responding to the Motion for Contempt

The ELNY class action lawsuit does not violate the ELNY Liquidation Order injunction because:

The ELNY payees' attorneys "tailored
their Complaint specifically and conservatively to avoid any claim
against ELNY or its assets and any claim properly precluded by the
injunction or immunity provisions of the April 16th Order of this Court,
acting within its subject matter jurisdiction."

"[D]oes not concern how ELNY was run prior to being placed into rehabilitation or seek any damages payable from estate assets;

"[D]oes not affect or even seek to prevent the Court’s Order of Liquidation and Restructuring Agreement from proceeding;

"[D]oes
not seek to hold the Receiver liable for any conduct of administering
the business and assets of ELNY while acting in good faith with
appropriate care in compliance with the Court’s prior Order of
Rehabilitation."

The Superintendent's Motion for a Contempt Order should be denied because:

The ELNY class action lawsuit is outside the scope of the ELNY liquidation.

The ELNY liquidation court's subject matter jurisdiction is limited to administration of the ELNY estate.

The ELNY Liquidation Order's injunction provision cannot be broader than the scope of judicial immunity.

The
injunction provision should be interpreted and enforced consistent with
the purpose and provisions of New York insurance law Article 74.

The
claims made in the ELNY class action lawsuit seek to hold the
Superintendent and his agents liable in their personal capacities for
bad faith conduct.

The ELNY liquidation court should not hold the plaintiffs in the class action lawsuit or their attorneys in civil contempt.

The injunction does not clearly and unequivocally bar suits against the Superintendent in his personal capacity.

Positions
taken by the ELNY shortfall payees in the ELNY appeal are not
admissions, but rather the proper way to protect their rights.

ELNY Appeal

The ELNY Order's injunction, and its related grant of immunity, are simultaneously being contested in an ELNY appeal filed May 30, 2012 with the Appellate Division of the Supreme Court of the State of New York, Second Department. Oral arguments for the ELNY appeal occurred November 15, 2012 but no decision has been announced. This S2KM blog post
summarizes the injunction arguments in the Superintendent's appellate
brief and the ELNY shortfall payees' appellate reply brief.

November 14, 2012

In a companion article to the National Underwriter's recent comprehensive analysis of the Executive Life of New York (ELNY) Liquidation ("The Complete ELNY Saga"), writer Warren Hersch asks: "is the structured settlement process in need of reform"?

The Hersch article highlights a "potpourri" of structured settlement issues:

Business practices - including disclosure and suitability issues

Structured settlement regulation - or lack thereof

Industry lobbying

Industry education

Broker compensation

Structured settlement transfers

IRC 468B qualified settlement funds

Declining annuity sales

Increasing case complexity - including annuity/trust blended products

An evolving settlement planning profession

Responsibilities of plaintiff attorneys

Financial strength of annuity providers

In addition to industry criticism, the article features diverse individual perspectives demonstrating a foundation for industry consensus:

Len Blonder

“No other option today can match the structure’s mix of tax-free income and guaranteed security.”

"A casualty company should ... be allowed to vet their own representatives of choice.”

"Plaintiffs are free to hire any financial professional from among the tens of thousands that are available to them."

Joseph Dehner

"A
personal injury attorney for claimants who isn’t even considering a
structured settlement in high damage cases is bordering on malpractice."

“Structured
settlements have become both more flexible and complicated because of
the advanced planning that now accompanies these transactions.”

“The
qualified settlement fund (QSF) allows for a significant increase in
the amount of time that payees have to make necessary determinations.”

"But
for the single plaintiff, use of the vehicle comes with uncertainty.
That’s because it is unclear whether a single plaintiff is treated for
tax purposes as receiving funds deposited into a QSF."

Timothy Morbach:“More
should be done to recognize that the field of settlement planning is
highly specialized and that [claimants] should make efforts to retain
separate and qualified financial and legal counsel with respect to the
strategies they wish to implement.”

Charles Schell:“If
the plaintiff's attorney engages a settlement planner, then .... , more
likely than not, the product or plan recommended will be suitable.”

Peter Gallanis:"The
rate of insolvencies among life and health insurers, now at an all-time
low, are but a fraction of the hundreds of failures within the
commercial and investment banking and thrift sectors during the
financial crisis."

Perhaps this National Underwriter article will help motivate the structured settlement industry to undertake its own strategic analysis about whether and how to reform the structured settlement process. Immediate existential challenges certainly exist. In addition to the ELNY liquidation, these challenges include:

Transitioning business skills, relationships and processes to the Internet.

Assuming Charles Darwin was correct:It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

The primary strategic issues for the structured settlement industry are whether, when, how and to what degree it will become "responsive to change"?

Can industry leaders:

Be honest ?
- Acknowledge the problems. Study the changes. Abandon political
correctness. Question traditional assumptions, business models and
business practices.

Be inclusive ? - David Ringler, NSSTA's first president, re-stated NSSTA's original vision during NSSTA's 2011 annual conference: "I
still believe having a place where everyone and anyone can sit down
with each other and discuss the issues and viewpoints regardless of
beliefs is the most important reason for NSSTA. ... If we can continue this tradition, there is no
problem we cannot overcome."

Be open ? - The late James Corman insisted promoters of structured settlements were "on the side of the angels".
Does that statement remain true today? To regain public trust, empower
stakeholders and expand the customer base, structured settlement
strategic planning needs to re-emerge from behind closed doors.
Important industry issues need to be articulated and discussed openly.

Listen to customers ? - The profiles of ELNY structured settlement victims featured in "The Complete ELNY Saga" provide a valuable introduction. Prior market surveys should be re-visited, updated and expanded. The traditional "one and done" structured settlement customer model needs to be re-evaluated.

Engage critics ?
- and challenge/encourage critics to be part of an industry solution by
incorporating their relevant issues and best ideas into a strategic
thinking process? These critics include legal and financial
professionals who view the structured settlement product and market as core components of a larger and more complex settlement planning
industry.

For related S2KM reporting and analysis, see the structured settlement wiki:

September 30, 2012

Will Qualified Settlement Funds (QSFs) eventually replace structured settlements as the standard business model for resolving complex personal injury claims?

QSFs already represent the standard resolution technique for class action lawsuits - and provide advantages for both defendants and plaintiffs:

Defendants
not only obtain an immediate tax deduction and release, they also can
reduce their settlement planning costs and risks.

Plaintiffs can
conduct their settlement planning with a sum certain, using their own
advisers, free from the pressures of litigation, with unlimited time to
analyze and address tax, investment and government benefit issues.

QSFs can also be utilized to purchase tax-free structured settlements without any direct involvement by defendants.

The only opponents of QSFs,
for becoming the settlement planning standard for all complex
personal injury cases, appear to be advocates for the traditional claim
management structured settlement business model. These advocates include
liability insurers who attempt to direct claim dollars to their
affiliate life companies and defense brokers who fear the loss or
reduction of their annuity commissions.

Together, with political support from the National Structured Settlement Trade Association (NSSTA), these QSF opponentshave spent
hundreds of thousands of dollars attempting to limit both the scope of
QSFs and the expanded utilization of QSFs. Maintaining that structured
settlements are best created when both plaintiffs and defendants
actively participate, the QSF opponentsargue that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements.

To sustain their argument, QSF opponents have organized and promoted a marketing and lobbying strategy that:

Ignores the IRC section 468B regulations that allow a QSF to be “established to resolve or satisfy one or more
contested or uncontested claims that have resulted or may result from
an event (or related series of events) that has occurred and that has
given rise to at least one claim asserting liability". (emphasis added)

Expands
their own definition of single claimant to encompass multiple single
event claims by family members, their attorneys and lien holders
including Medicare and Medicaid.

Fortunately for defendants and plaintiffs, utilization of QSFs (including single claimant QSFs) appears to be expanding
as more settlement planning stakeholders learn about the advantages of
QSFs and the professional QSF community of practice continues to grow.

Thatconclusion was S2KM's most important take away from the first QSF Symposium sponsored by Evolve Bank and Trust in Memphis, Tennessee on September 27-28, 2012.

Organized
to stimulate dialogue among QSF industry leaders and experts and to
help shape industry thinking on QSF issues, the first QSF Symposium was
restricted the 20 participants and included the following speakers and topics:

June 22, 2012

Although the Internet has already transformed how we communicate, work and interact socially, its impact on formal education has been surprising limited. Parents of college students continue to pay exorbitant costs to enable their sons and daughters to attend colleges and universities where in person (F2F) lectures predominate. Professionals continue to attend expensive in person conferences to obtain continuing education credits.

Massive Open Online Courses (MOOCs) represent a relatively new Internet development with the potential to transform our educational paradigms.

Although the idea of moving classroom instruction and educational content to the web has existed since Al Gore (claims to have) invented the Internet, most educators and educational stakeholders have resisted the idea. More recently, MOOC companies such as Coursera, Udacity, and edX have expanded their participants and appear to be attracting significant investment and generating considerable growth.

S2KM recently became aware of MOOCs during a conversation about knowledge management with Dr. Martha Pollack, Vice Provost for Academic and Budgetary Affairs at the University of Michigan. Dr. Pollack, who previously served as Dean of the School of Information at the University at Michigan, specifically recommended Coursera.

Coursera is a social entrepreneurialship company that currently partners with Princeton University, Stanford University, University of California, Berkeley, University of Michigan, and University of Pennsylvania. Their online courses are free and open to anyone. Patrick Hindert, S2KM's author, has signed up to participate in a six week course taught by Dr. Charles Severance titled "Internet History, Technology and Security" which begins July 23, 2012.

What do MOOCs have to do with structured settlements and settlement planning? Currently nothing - other than to suggest the MOOC movement, if successful, could impact and improve professional as well as academic education. The need for improved education seems especially true for settlement planning on account of its relative complexity, changing legal and financial rules and multi-professional teams.

The Wikipedia entry for "Massive Open Online Courses" identifies several organizing principles for MOOCs including: aggregation; re-mixing; re-purposing; feeding forward; and connectivism. One of the earliest MOOC courses (2008) titled "Connectivism and Connective Knowledge" was taught by George Siemens and Stephen Downes.

Proponents of connectivism, according to Wikipedia, believe it represents a new theory of learning "based on the premise that knowledge exists in the world rather than in the head of an individual." Consequently, one aspect of connectivism is the use of social networks comprised of nodes and connections as a primary metaphor for learning.

As structured settlement and settlement planning leaders contemplate how to improve and grow their related markets, industry stakeholders might benefit from greater knowledge about MOOCs and might consider the following principles of connectivism as set forth in Wikipedia:

"Learning and knowledge rests in diversity of opinions.

"Learning is a process of connecting specialized nodes or information sources.

"Learning may reside in non-human appliances.

"Capacity to know more is more critical than what is currently known

"Nurturing and maintaining connections is needed to facilitate continual learning.

"Ability to see connections between fields, ideas, and concepts is a core skill.

"Currency (accurate, up-to-date knowledge) is the intent of all connectivist learning activities.

"Decision-making is itself a learning process. Choosing what to learn and the meaning of incoming information is seen through the lens of a shifting reality. While there is a right answer now, it may be wrong tomorrow due to alterations in the information climate affecting the decision."

April 15, 2012

Sheltered from the violent storms that unleashed dozens of tornadoes across Oklahoma and the plains states on April 13-14, 2012, the University of Tulsa College of Law hosted the Richard B. Risk Jr. Settlement Planning Practicum which organizers believe was the first time any law school has sponsored a settlement planning educational conference.

Risk, a national authority on structured settlement law and one of the founders of the Society of Settlement Planners (SSP), endowed the settlement planning practicum which is expected to become an annual event for attorneys and law students. Risk invited and introduced the practicum presenters in the following speaking order: Joseph Tombs, Patrick Hindert, Mark Popolizio, Jeremy Babener, Jack Meligan and Professor Carl Pierce.

Joseph Tombs

Tombs, a lawyer, certified financial planner and former SSP President who, working with Risk, helped organize the Registered Settlement Planner (RSP) certification program, addressed "Common Issues Attorneys Face When Settling Cases". As part of his presentation, Tombs contrasted settlement planning and financial planning. One primary difference, according to Tombs, is the relative importance in settlement planning of "dissipation risk". Other differentiating factors identified by Tombs include the importance of: government benefits, medical forecasting and special needs legal issues. Tombs discussed structured settlements as a core settlement planning tool that combines relatively low investment and dissipation risks.

Tombs emphasized the multi-professional skill sets settlement planning requires and described settlement planning as an evolving profession stating: "The more we study and practice settlement planning, the more we realize its complexity and understand its challenges." He offered the following definition for settlement planning: "a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life."

Patrick Hindert

In his presentation titled "The History of Structured Settlements", Hindert (co-author of "Structured Settlements and Periodic Payment Judgments" and author of S2KM's blog) provided a visual analysis featuring schematic diagrams to explain how structured settlement has evolved from a claim management tool into a core component of the larger and more complex settlement planning profession - and how competing business models have restricted the growth of the structured settlement annuity market.

Hindert stated key structured settlement stakeholders have succumbed to "path dependence" by failing to strategically study and analyze continuing industry changes. Structured settlement business models and practices that once made sense and represented "industry standards", according to Hindert, have survived despite the eclipse of their justification, benefit and/or better alternatives.

Hindert described settlement planning as an "emergent system" and quoted John McWhorter, a linguist at Columbia University, to help explain the significance for structured settlements:

"Emergent systems [settlement planning] are ones in which many different elements interact. The pattern of interaction then produces a new element [settlement planning] that is greater than the sum of the parts, which then exercises a top-down influence on the constituent elements [including structured settlements]."

To improve and grow the structured settlement market, Hindert recommended more detailed and comprehensive study of alternative structured settlement payment models and life cycles within the broader context of settlement planning as an important and necessary first step.

Mark Popolizio

A nationally recognized legal authority in Medicare Secondary Payer (MSP) compliance and a current board member of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), Popolizio addressed how Medicare impacts settlement planning. Starting with an introductory Medicare road map, he next discussed CMS' reimbursement rights for conditional Medicare payments - who is at risk; what is Medicare's recovery amount; how to challenge conditional payments; how to obtain information; CMS' most recently announced policies and payment options; and recent case law developments.

Popolizio also discussed Medicare set-aside arrangements (MSAs), in the context of both workers compensation and liability cases, as CMS' recommended method for protecting Medicare's future interests under the MSP Act. For liability cases, he began by emphasizing why the key issue is not: "Are liability MSAs required?" Instead, Popolizio reviewed two recent CMS memoranda providing informal information about how CMS looks at liability MSAs. Finally, Popolizio offered his own recommendations (a three-step process) for approaching the liability MSA issue and also reviewed recent related case law.

Jeremy Babener

Babener, a rising star among structured settlement legal and tax experts, offered a comprehensive overview of "Taxation in Personal Injury Cases". He began by outlining sources for tax authority, the variables for tax liability and the character of income. Next, he discussed the exclusion for personal injury damages and explained the language of IRC 104(a)(2) before addressing other damages in personal injury cases - past and future medical expenses; punitive damages; and pre and post-judgment interest.

Babener explained the importance of documentation, including the complaint and the settlement agreement, to maximize the exclusion for personal injury damages. He highlighted specific facts that frequently create problems with the IRS and conversely how to encourage the IRS to respect the documents so as to obtain the preferred tax result. Babener concluded by addressing these additional settlement tax considerations: legal expenses; structured settlements; qualified settlement funds; and transfers of structured settlement payment rights.

Jack Meligan

Meligan, a founder and current President of the SSP, discussed "Pitfalls in Settlement Planning and How to Avoid Malpractice"; offered reasons why personal injury claimants and their attorneys need settlement planning advice from a qualified professional or team of professionals; and reviewed an example of a settlement plan. In addition, Meligan:

Summarized three cases (Grillo; Lyons; and Spencer) to demonstrate why structured settlements need to be considered and risks associated with certain business behavior;

Cited statistics from American Bar Association studies to underscore the frequency and risk of malpractice cases against personal injury attorneys;

Cautioned plaintiff attorneys against failing to retain an independent settlement advisor; or to advise their clients about all settlement options (including the pros and cons of structured settlements); or to completely document their files as proof of their best practices.

Professor Carl Pierce

Professor Pierce is the W. Allen Separk Distinguished Professor of Law and Director of the Howard Baker, Jr. Center for Public Policy at the University of Tennessee. Among his professional activities, Professor Pierce has served as Reporter for the Tennessee Bar Association Standing Committee on Ethics and Professionalism and as Associate Reporter for the American Bar Association Special Commission on Evaluation of the Rules of Professional Conduct. During 2007-2008, Professor Pierce served as Consultant to the Society of Settlement Planners (SSP) and helped review and draft the SSP's Standards of Professional Conduct for Settlement Planners (SSP Standards).

Professor Pierce provided a summary comparative analysis of both the National Structured Settlement Trade Association (NSSTA) Statement of Ethics and Professional Responsibility (NSSTA Code of Ethics) and the SSP Standards. Despite substantial experience working with litigators, Professor Pierce acknowledged surprise by the degree of hostility between some plaintiff and defense structured settlement consultants. Professor Pierce:

Observed that all law school graduates need some exposure to structured settlements and settlement planning;

Suggested that the business collaboration models among insurance companies, plaintiff attorneys and settlement planners could look very different in the future; and

Recommended that representatives of NSSTA and SSP meet to discuss and compare their respective statements of ethics and standards.

Congratulations to Richard Risk, the University of Tulsa College of Law and the guest speakers who participated in the Settlement Planning Practicum. S2KM understands that Tulsa College of Law will publish a video compilation of the practicum speaker presentations on YouTube.

December 20, 2011

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.

William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.

American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs." Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).

The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification. S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

November 18, 2011

S2KM has received both positive and negative private feedback about S2KM's coverage of the National Association of Settlement Purchasers (NASP) 2011 Annual Meeting. Although S2KM welcomes any feedback, private or public, negative feedback generally provides greater focus and incentive for afterthoughts.

Among the private criticisms S2KM has received:

S2KM is biased toward (or has an affinity for) the secondary market at the expense of the primary market.

S2KM should be more of a positive voice for change and not a muckraker.

Bias Toward the Secondary Market

S2KM believes that IRC 5891 and the state protection statutes have radically changed and improved both the structured settlement product and the structured settlement market. To paraphrase NASP President Matt Bracy: structured settlement recipients, in compliance with federal and state laws, now have the right to sell their asset (payment rights) provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents. Instead of the "grey" secondary structured market that existed from 1986 to 2000, the secondary market is now regulated by state judges and the Internal Revenue Service with substantial penalties for transfer companies who do not comply with federal and state statutes.

Many primary market participants will disagree with portions of the above paragraph. They do not view structured settlements transfers either as a product improvement or as a recipient's "right" however that right may be qualified by statute. In S2KM's opinion, the primary market's general attitude toward and perspective of the secondary market since 2001 represent a serious strategic mistake that has caused considerable harm to the primary structured settlement market. Instead of improving their own products by adding commutation or transfer features, and re-learning how to sell their product in a statutorily re-defined market, the primary market continues to criticize and shun the secondary market.

By comparison, NASP regularly invites and welcomes critics to speak at its educational conferences. These critics have included blogger John Darer, two current co-chairpersons of the NSSTA Legal Committee Peter Vodola and Stephen Harris, and current SSP President Jack Meligan, as well as judges from states where structured settlement transfers are viewed most negatively. Among NASP presentations by S2KM author Patrick Hindert (Hindert), see "How the Primary Market Views Factoring".

Criticizing Business Conduct

Beginning in 2004, S2KM has reported and discussed both primary and secondary structured settlement market business practices and business models. For compilations of S2KM's reporting about secondary market business practices (good and bad), see the Secondary Market page on the structured settlement wiki. For detailed information about pre-2001 secondary market business practices and issues, see section 16.02[2] of "Structured Settlements and Periodic Payment Judgments" (S2P2J) of which Hindert is a co-author.

For S2KM reporting and commentary about primary market business standards and practices, see also the structured settlement wiki:

Wikipedia defines the contemporary use of the term "muckraker" to mean "a journalist who writes in the adversarial or alternative tradition or a non-journalist whose purpose in publication is to advocate reform and change." When S2KM began publishing in 2004, social media (including blogs, wikis and podcasts) represented an "alternative" to traditional print media and educational conferences. Social media provides an opportunity for unpopular or minority ideas and viewpoints to gain an audience not otherwise available. Unfortunately, social media also has a dark side which can include personal attacks and bullying.

In advocating for improved structured settlement business practices and business models, S2KM has attempted (with a few exceptions which S2KM regrets), to follow the lessons taught in "Getting to Yes" which at one time represented a guidebook of sorts for the primary structured settlement market. Perhaps the "Getting to Yes" method can still be useful to help a divided structured settlement industry improve and grow:

Separate the people from the problem.

Focus on interests not positions.

Invent options for mutual gain.

Insist on using objective criteria.

Without more strategic conversations that include all structured settlement stakeholders and perspectives, the structured settlement industry will never achieve its full potential. To the extent possible, S2KM intends to encourage and to be part of those strategic industry conversations. Some of S2KM's preliminary contributions appear on the following pages of the structured settlement wiki:

October 12, 2011

A 2011 National Litigation Management study sponsored by the Council on Litigation Management (CLM):

Identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives;

Determined that more than 74 percent of the study's participants rated their available litigation management metrics as "Fair" or worse for measuring the effectiveness of their litigation management programs; and

Concluded that, to be successful, national litigation management service programs must deliver metrics and analytics that justify the quality, performance, and satisfaction levels litigation management executives are seeking.

S2KM addressed structured settlement "quality" metrics and analytics in a prior blog post and highlighted the historic payout performance of structured settlement annuity providers which has been excellent though not perfect. Fulfilling the promise to pay future periodic payments has represented a primary mission of the United States structured settlement industry for more than 30 years.

This blog post addresses structured settlement "performance" metrics and analytics from the perspective of litigation management executives and focuses upon three issues:

Structured settlement premium;

Structured settlement "success ratios"; and

The cost or cost savings structured settlements generate for defendants and liability insurers.

Structured Settlement Premium

Based upon industry input and sources, S2KM estimates the structured settlement industry has produced approximately $124 billion of annuity premium from 1976 to 2010. For the past five years (2006-2010), the total average annual structured settlement annuity premium has been approximately $5.8 billion per year.

To help evaluate these numbers, compare the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:

Based upon Towers Watson's most recent 2010 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that since 2006, more than $160 billion (65%) of United States tort costs annually have represented payments to injury victims and their attorneys.

Structured Settlement "Success Ratios"

In 2007, the National Structured Settlement Trade Association (NSSTA) reported the results of a survey titled "A Study of the Structured Settlement Process Conducted on behalf of the National Structured Settlement Trade Associations".

The survey was directed by Robert E. Hoyt, the Dudley L. Moore, Jr. Chairman of Insurance at the Terry College of Business at the University of Georgia.

Among the conclusions and estimates: only 7% of personal injury settlements between $75,000 and $200,000 include structured settlements; and only 30% of personal injury settlements above $1 million include structured settlements.

Another perspective for structured settlement "success ratios" is provided by the 2011 report of the Joint Committee on Taxation (JCT) which the House Ways and Means Committee and the Senate Finance Committee use for determining the relative merits of achieving specific public policy goals through tax benefits or direct outlays. This 2011 report (which represents the first time the JCT has ever provided a specific category for structured settlements) estimated the Federal tax revenue loss resulting from structured settlements was "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year. Compare these numbers with S2KM's estimate of 716,500 structured settlement annuities sold between 1976-2010.

Structured Settlement Costs or Cost Savings

Since structured settlements were first introduced in the late 1970s, proponents have highlighted "claims cost savings" as a primary justification for defendants and liability insurers to promote and fund structured settlements.

In a 2011 research paper, Jeremy Babener did not discover much empirical evidence to support this premise. Babener's research, however, did uncovered plenty of historical anecdotal evidence providing industry estimates of defense structured settlement savings which Babener summarized as follows:

From between 50% and 75% in 1974;

To between 20% and 40% in 1978; and

More recently to between 20% and 25%.

Based upon this historic anecdotal evidence, Babener concluded defendants and their liability insurers have proven themselves capable in the past of utilizing three structured settlement strategies to reduce their personal injury settlement costs:

Negotiating with nominal terms rather than real value;

Profiting from the purchase of a structured settlement; and/or

Negotiating to benefit from the tax subsidy.

A prior S2KM blog postexamines these three defense strategies in the context of the Spencer v. Hartford class action settlement and questions whether and how many defendants and liability insurers can actually save money promoting and funding structured settlements with current business models and traditional business practices in today's interest rate environment.

Compare the average yields on 30-year U.S. Treasury bonds for two five year time periods:

1980 to 1984 - 12.21%

2006 to 2010 - 4.47%

The impact of drastically reduced interest rates completely reverses the advantageous leverage defendants and liability insurers previously obtained from negotiating with structured settlements. Assuming good business practices (full disclosure, informed consent and no misrepresentations), how do litigation management executives:

Perhaps it is time for litigation management executives to re-think structured settlements including the metrics and analytics they use to define success and measure performance as well as alternative structured settlement business models.

May 29, 2011

This blog post continues S2KM's discussion of the 2011 annual conferences of the Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) with a strategic perspective. A prior S2KM blog post identified speakers and topics featured by SSP and NSSTA. Subsequent S2KM blog posts will summarize and provide commentary about selected speaker presentations.

SSP's conference, open to members and non-members, addressed two general topics: "Special Needs Settlement Planning" and "Practice Improvement: Marketing and New Products". NSSTA's conference, for members only, celebrated NSSTA's 25th anniversary. It also included a NSSTA business meeting with reports from immediate Past-President Michael Kelly, new President Dan Finn, Executive Director Eric Vaughn, Assistant Executive Director Peter Arnold and the Chairpersons of NSSTA's several committees.

One of the highlights of NSSTA's 2011 conference was the honoring of NSSTA's past presidents. David Ringler, NSSTA's first president, spoke briefly at the conference and re-stated his original vision for NSSTA:

"Although we do need to constantly be on the watch for legislative change, I still believe having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs is the most important reason for NSSTA. I have called it a common “talk table”, although I agree that is not exactly a very elegant term. If we can continue this tradition, there is no problem we cannot overcome."

Many industry participants, including some NSSTA members, question whether NSSTA has lost sight of this original purpose and tradition. Does NSSTA continue to represent "a place where everyone and anyone can sit down with each other and discuss [structured settlement] issues and viewpoints regardless of beliefs"? The answer, unfortunately, is "no".

For the past several years, NSSTA's leadership has superimposed a strict political litmus test for membership as well as for topics and speakers at its educational conferences. As one result, structured settlement industry participants with alternative issues, viewpoints, beliefs and educational interests have founded two other national structured settlement associations: the National Association of Settlement Purchasers (NASP) in 1996 and SSP in 2000.

Fortunately for NSSTA members and the structured settlement industry, based upon its 2011 conference, NSSTA appears to be expanding the scope of its educational programs to address important but controversial industry topics such as IRC 468B Qualified Settlement Funds, IRC 5891 and state structured settlement protection statutes. The educational programs offered by both NSSTA and SSP also increasingly discuss three fundamental transitions reshaping the structured settlement industry:

From structured settlements to settlement planning;

From a singular, illiquid, and non-assignable product to multiple products with greater flexibility to address changing needs and circumstances of injury victims;

From traditional (pre-Internet) to web-based business models, processes and skill sets.

With the structured settlement industry facing these and other challenges, including aging leadership, declining structured settlement annuity sales, anticipated legislative changes plus an increasingly complex legal and regulatory business environment, where is the strategic vision and what are the strategic priorities for NSSTA and SSP?

Two of NSSTA's featured speakers, Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, and William T. Robinson lll, President-Elect of the American Bar Association (ABA), added important and positive assessments for structured settlements.

Morris accentuated the current financial strength of U.S. life insurance companies and explained why structured settlement annuities represent an excellent strategic product for life companies. As corollaries to Morris' presentation:

NSSTA announced that two highly rated annuity providers, Mutual of Omaha and Berkshire Hathaway, have re-entered the structured settlement market; and

Thomas Ronce and Craig Ulman clarified the life and health guaranty association system and how that system applies to structured settlements.

Robinson praised structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Structured settlements represent "state of the art" tools for all attorneys to consider when negotiating and resolving personal injury cases according to Robinson. In his capacity as President-Elect of the ABA: Robinson also:

Spotlighted the current funding crisis facing state courts; and

Suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.

May 09, 2011

In a 2010 article titled "How Plaintiffs Might Receive Emotional Distress Damages Tax-Free After 2010", published in the "North Carolina Lawyers Weekly", Jeremy Babener asked a pointed and strategic question: how can the structured settlement industry encourage more damages to be received tax-free? Doing so, presumably, would expand the structured settlement market.

Several proposals to accomplish these objectives have been offered during the past few months - some of which resulted from a U.S. Department of the Treasury public hearing held on February 23, 2010 to consider proposed new Treasury regulations for IRC section 104(a)(2). If adopted, these proposed new Treasury regulations would make two primary changes to current regulations:

Eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion, and

Incorporate 1996 legislation requiring that personal injuries and sickness damages be “physical” in order to qualify for the section 104(a)(2) exclusion.

In the context of these proposed new Treasury regulations, the structured settlement industry would benefit from greater discussion and a better understanding of the following recent tax proposals to expand application of the section 104(a)(2) tax exclusion:

The National Taxpayer Advocate, which considers taxpayer considerations from inside the IRS, has recommended that section 104(a)(2) exempt non-physical damages, specifically emotional distress, mental anguish, and pain and suffering.

John McCulloch proposed, during the February 23, 2010 public Treasury hearing, that damages received by victims of prolonged sexual abuse or false imprisonment should always be deemed “physical” for purposes of IRC section 104(a)(2) whether or not evidence is available to demonstrate physical injury.

Richard Risk and Jack Meligan each recommended, during the same public hearing, that Treasury issue regulations explicitly holding the economic benefit doctrine will not be triggered in the context of single-claimant 468B Qualified Settlement Funds.

David Higgins has proposed two recent tax recommendations. In a written submission for the Treasury public hearing, Higgins argued that the IRS’ definition of "physical" is inadequate: “direct unwanted or uninvited physical contacts resulting in observable bodily harm such as bruises, cuts, swelling, and bleeding.” Higgins recommends a broader definition, including damages for:

A doctor’s misdiagnosis resulting in death or serious injury from delayed or missing treatment;

Higgins directed his second recommendation to Senator Max Baucus (Chairman of the Senate Finance Committee), Congressman Dave Camp (Chairman of the House Committee on Ways and Means), and Michael Mundaca (Assistant Secretary of the Treasury for Tax Policy). In his communication, Higgins recommended a "rollover provision" to replace Section 130 of the Tax Code. Higgins' proposal would allow personal injury plaintiffs to accept a check from defendants and invest the money within a given period (likely limiting the investment options to annuities and Treasury bonds), without losing the tax benefit currently available to them only by agreeing to a structured settlement with a counter-party.

Jeremy Babener has proposed a legislative conversion of the structured settlement exclusion to a refundable tax credit. The premise of Babener's proposal is that high-income taxpayers benefit more from the structured settlement subsidy than low-income taxpayers, who sometimes do not benefit at all. A refundable tax credit would provide the same incentive value to all structured settlement recipients, high-income or low-income.

Most recently, McCulloch has incorporated his earlier recommendations into a request to Treasury and the IRS that final regulations under IRC Section 104(a)(2) should clarify the scope of the exclusion for damages received on account of personal "physical" injuries or "physical" sickness. McCulloch's request seeks guidance and a determination as part of Treasury's 2011-2012 Guidance Priority List that sexual abuse cases and long-term wrongful incarceration (at least one year of restraint) are per se physical injuries under Section 104(a)(2).

In support of his proposal, McCulloch states: "There is a significant body of literature that recognizes sexual abuse as a serious medical problem with long lasting and severe physical effects, many of which can only be treated by a licensed medical practitioner or through the prescription of controlled medications. There are similar medical studies that demonstrate the persistent physical damage that results from long-term incarceration."

The purpose of the Treasury's Priority Guidance Plan is to focus United States government resources "on guidance items that are most important to taxpayers and tax administration." In reviewing recommendations and selecting projects for inclusion on the 2011-2012 Guidance Priority list, the Treasury and the IRS have stated they will consider whether the recommended guidance:

Resolves significant issues relevant to many taxpayers;

Promotes sound tax administration;

Can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;

Involves regulations that are outmoded, ineffective, insufficient, or excessively burdensome and that should be modified, streamlined, expanded, or repealed;

Reduces controversy and lessens the burden on taxpayers or the IRS; and

Whether the IRS can administer the recommended guidance on a uniform basis.

McCulloch maintains his request for guidance satisfies the above criteria:

Since Section 104(a)(2) was amended in 1996, taxpayers have needed guidance to determine the scope of the terms "physical injury" and "physical sickness" for which no definitions exist.

The 1996 amendment did not specifically consider its application to victims of sexual abuse and wrongful incarceration and needs modification because it affects a large and growing number of taxpayers:

For sexual abuse victims, because of greater opportunities for victims resulting from legislation in many states which extends applicable statutes of limitations.

For wrongful incarceration victims, because more widely available DNA-testing absolves wrongfully convicted prisoners.

It would also provide consistency in tax treatment among such victims who face uncertainties and expense when they currently attempt to address these issues individually.

In S2KM's opinion, industry support for McCulloch's proposal would provide one immediate answer to Jeremy Babener's strategic question about how the structured settlement industry can cooperate to improve and grow its market by encouraging more damages to be received tax-free under IRC section 104(a)(2).

For additional information about taxation of damages received by personal injury victims, see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J)